Riding Bitcoin's digital roller coaster

Scott Nguyen emerges from a salon chair at Splitends Salon in downtown Santa Ana to pay for his freshly cut hair. For the past 20 years, the Laguna Hills resident has gotten the same trim every three or four weeks from the same guy. The only change is that about six months ago, Nguyen started paying in digital cash.

Today’s haircut will cost 0.1285 bitcoin.

Salon owner and stylist Christopher Hall creates a unique code on his smartphone showing that amount and the address of his digital wallet. Nguyen scans the code with an app on his own mobile device to approve the transaction. Within seconds, the sound of clinking coins from Hall’s phone signals a completed deal.

“Now that was super-boring, but that’s real money,” Hall says.

Hall is part of a small and slowly growing club of Orange County merchants who accept the new form of digital money. Nguyen, a bitcoin enthusiast who convinced Hall to make the leap, is determined to convert more local businesses and build up the currency’s legitimacy.

Bitcoins — which are not backed by the U.S. government and are generated by solving math problems with computers — aren’t physical currency, but they can be used to buy a variety of goods.

That includes Amazon gift cards, organic deodorant — even children. Dr. C. Terence Lee, a fertility specialist in Brea, grabbed national headlines in June after claiming he made the first “bitcoin baby.” Lee said the child was conceived through fertility services paid for with the virtual currency.

For true believers, bitcoin signifies freedom from the control of big banks and government. That especially resonates with Americans who lost faith in those institutions following the financial collapse, said Brett Florio, co-founder of e-commerce service company FoxyCart, which began to take bitcoins this spring.

“There’s much frustration toward the financial sector,” said Florio, a former Seal Beach resident whose clients include mega-nonprofit groups World Wildlife Fund and Oxfam America. “It’s not hard to look to bitcoin to see the appeal to a wide variety of people across the political spectrum.”

Critics point out that without the government to back it up, bitcoin’s value can wildly fluctuate based on the enthusiasm and speculation of its users. The only U.S. regulation tied to the currency so far requires operators of bitcoin exchanges, where they can be traded for dollars, to register as “money transmitters.”

Lately, the value of bitcoins has been soaring. Worth about $12 in December, a bitcoin now trades for more than $400. Some of the demand is coming from China following the announcement that Baidu, that nation’s largest Internet search engine, would accept the digital currency for certain services.

At the same time, a new report surfaces every few days of a spectacular bitcoin theft from someone’s computer. This week, the sudden disappearance of a bitcoin exchange in China left users high and dry. The FBI shut down an online marketplace called Silk Road last month and arrested its alleged founder. The website allowed visitors to buy drugs and guns with bitcoins, said federal officials, who seized $28.5 million worth of the digital currency.

“It’s been a pretty wild ride so far,” said Lana Swartz, a USC researcher who co-published a paper on bitcoins this year with UCI’s Maurer.

If you’re thinking about joining the bitcoin bandwagon, be prepared to spend some money.

Nguyen, the salon client, keeps more than 20 machines running nonstop at his home to “mine” bitcoins, a resource-heavy method of accessing the digital currency. Those “miners” contain computer chips that perform rapid successions of calculations to go through all previous bitcoin transactions featured in a universally trusted ledger.

The point of mining is to verify the validity of previous deals — hard work that can ultimately be rewarded with transaction fees and newly mined coins. Nguyen makes about $500 worth of bitcoins a month. Mining gets increasingly challenging as more users and transactions enter the system because there are more deals to verify. It’s also a pricey operation. For Nguyen, all that computing work translates into a $700 a month electricity bill.

Mining is still worth his time, he says, because he got in early. Nguyen entered the market when a bitcoin was worth a couple dollars, and the appreciation from his bounty has covered the cost of his machinery and more.

“I’m one of the lucky ones,” said Nguyen, who came to his haircut on a recent Saturday in a Sunkist-colored shirt bearing the universal symbol for bitcoins.

Users can also acquire bitcoins, of course, by accepting them in trade.

Lee, the fertility doctor, found a local man on the Reddit online site who was willing to pay for a fertility test with bitcoins. Lee sweetened the deal with a 25 percent discount.

Later, Lee persuaded a couple to purchase fertility treatment with bitcoins. He cut the usual price by half. Lee says that transaction led to what he claims is the first bitcoin baby.

“It’s something new and cutting edge,” Lee said. “One of the things about my specialty is if you adopt something early and are trying something new, it makes a difference in the field of medicine.”

Not all merchants who dabble with bitcoins come away as enamored.

Jefferson Kim, a local hotel executive who was mining bitcoins, offered the option of paying with the digital cash at the Howard Johnson Hotel and Conference Center in Fullerton and the Days Inn in Buena Park, where he’s executive vice president.

It took only one deal to change Kim’s mind. New Yorker reporter Joshua Davis approached him roughly two years ago while researching a story on the currency. Davis created an account, bought bitcoins with U.S. dollars, then sent the money to Kim. Kim wound up charging a 30 percent mark-up to cover the possibility of bitcoin’s value plummeting the next day.

“This is obviously not worth my time to try it anymore,” he said. “What was the point of all that? He started with US dollars and I ended up with (US dollars.)”

Lingham is the co-founder and chief executive of Gyft, a San Francisco startup that buys gift cards at a bulk discount from big retailers such as Amazon and Nike and resells them on its website. It began taking bitcoins six months ago. This week, the company began to offer 3 percent cash-back in points for purchases made with bitcoin.

“I think bitcoin is the first real currency of the internet,” Lingham said. “If you’re a business, and you want to tap into people who are online, that’s most people, it just makes sense.”